It’s not often the Financial Services Compensation Scheme (FSCS) makes an appearance on primetime telly. You might have spotted it in episode two of Russell T. Davies’s futuristic family saga Years and Years. When the Bismay-Lyons family sell their London home for £1.2m, husband Stephen stashes the proceeds overnight in a US investment bank. As the frantic red-flagging suggested, the bank was about to go bust. Stephen – and hundreds of other customers – are shown impotently banging their fists on the glass door. Thanks to the FSCS, his money is protected – but only up to £85,000.
So, what is the Financial Services Compensation Scheme? And what protection does it offer?
The Financial Services Compensation Scheme
Created in 2001, the FSCS is a compensation scheme for authorised financial services firms. The scheme pays compensation to customers if the firm is unable to pay claims against it. Cover is automatic and customers usually receive their compensation within seven days. The financial services covered include:
- Deposits (i.e. savings)
- Insurance policies
The maximum covered is £85,000 for deposits and £50,000 for investments and mortgages. This is doubled if you have a joint account. If Stephen had put the house proceeds in an account he shared with wife Celeste, they’d have salvaged £170,000 of their money. As a financial advisor, he should’ve known as much.1
Unfortunately for Stephen and Celeste, the temporary high balance provision has been scrapped in the future. Happily for us, it still exists in 2019. This protects people in exactly their position – those who have sold a property, inherited a large sum, or perhaps received an insurance payout. This additional cover applies on balances of up to £1m for a maximum of six months in specific circumstances. Let’s hope Russell T. Davies is wrong in predicting its demise.
How can I protect my money?
Well, firstly, make sure your savings and investments are with companies regulated by the Financial Conduct Authority. This means they’re part of the FSCS and your money is protected. Some investments – notably peer-to-peer (P2P) lending – aren’t covered, so can be riskier than stocks and shares. A few P2P firms have crashed recently, leaving investors with nothing.
If you have more than £85,000 in a sole account, consider spreading it across different institutions (you’re covered up to £85,000 per company, rather than per account). Yes, this is a faff, but it might give you peace of mind. This is especially fiddly with pension pots, where you’re likely to end up with a multiple six-figure sum. If you don’t want lots of accounts, be very careful where you put your money. Be wary of new banks offering seductive interest rates. Instead, seek out established names who’ve weathered previous financial crises.
Although your money is likely to be safer in the bank than under the mattress, you need to be aware of the protection available, and its limits. The FSCS doesn’t necessarily reflect the complex reality of 21st-century finance, where people cash in pensions and keep large sums of money in ordinary accounts. Remain alert to what’s happening in the banking world. This might not be your idea of entertainment, but nobody is more concerned with your financial future than you.
- Pedant’s Corner: Celeste tries to transfer the funds to another bank, so I’m guessing this was a joint account. Either the joint allowance has been scrapped in the future, or Russell T. Davies doesn’t find financial planning as riveting as I do. [↩]